US approves mammoth annual defense bill

The House approved its version of the annual defense policy bill Friday, which includes a number of controversial culture war amendments, setting the stage for a showdown with the Democratic-controlled Senate over legislation that typically enjoys bipartisan support, reports The Hill.

The US$883.7 billion measure — known as the National Defense Authorization Act (NDAA) — were approved in a largely party-line 217-199 vote. Six Democrats voted in favor of the measure, while three Republicans opposed it.

The House edition of the legislation is all but certain to languish in the Senate where Democrats, who hold the majority, abhor many of the amendments Republicans added, including those pertaining to abortion, transgender rights and diversity, equity and inclusion (DEI) initiatives.

The Senate Armed Services Committee this week held a markup for its version of the NDAA, the text of which is not expected to be released until July, a spokesperson for the panel told The Hill.

Leaders in both chambers will then craft a compromise version of the legislation, which has been voted on and signed into law every year for the past six decades.

Top Republicans, nonetheless, touted their bill as a strong measure that will back US troops, empower the National Guard to crack down on the southern border and provide American forces with innovative technologies.

At the top of the list of culture war amendments added to the House’s NDAA was a provision spearheaded by Rep. Beth Van Duyne that seeks to block a Biden administration policy that reimburses service members for the travel costs incurred when receiving an abortion.

It zeroes in on the same Pentagon policy that Sen. Tommy Tuberville targeted through his months-long blockade on military promotions last year.

Ahead of Thursday’s votes, Democrats warned GOP leaders against loading the bill with so-called poison pills — Rep. Mikie Sherrill, a Navy veteran, argued that the conservative amendments “cheapen” the defense bill. 

The GOP strategy of embracing culture war issues in the NDAA is not new. Then-Speaker Kevin McCarthy did the same last year, relying on a united GOP as almost all Democrats opposed the bill after Republicans loaded it with similar amendments attacking Pentagon policies on abortion access, medical care for transgender service members, and DEI initiatives.

Similar to last year, Republican leaders this time around had little room for error when it came to the final vote on the NDAA. Republicans have a razor-thin majority in the House, allowing them to lose just two GOP votes on any party-line measures, assuming all lawmakers are present.

The House-passed NDAA abides by the spending caps laid out in last year’s debt limit agreement, imposing one percent increase over the fiscal 2024 defense policy bill. The legislation, however, reshuffles billions of dollars proposed by the Pentagon, increasing funds for submarines, paring down money for fighter jets and delaying the retirement of dozens of aircraft.

The bill also has a provision that would rehire service members kicked out for refusing the COVID-19 vaccine.

In addition, the House NDAA contains widely supported quality of life initiatives for service members, such as a roughly 20% pay boost for junior enlisted members and increases to housing allowances.

 

China and Iran to strengthen BRICS

This year is the first year that Iran has formally joined the BRICS mechanism, which provides a new platform for China-Iran cooperation and enriches the vision and potential of the China-Iran comprehensive strategic partnership.

BRICS Foreign Ministers' meeting was held in Nizhny Novgorod, Russia on June 10 and 11.

 Member of the Political Bureau of the CPC Central Committee and Foreign Minister Wang Yi, attended the meeting and met with Iranian Acting Foreign Minister Bagheri. Wang expressed warm congratulations for Iran’s participation in the BRICS Foreign Ministers' Meeting for the first time as a formal member.

Nowadays, the world has entered a new period of turbulence and transformation. It is undergoing major shifts, division and regrouping, leading to more uncertain, unstable and unpredictable developments. BRICS is an important force in shaping the international landscape.

BRICS' expansion has ushered in a new era for the Global South to gain strength through unity, and the appeal and attractiveness of BRICS has been continuously increasing.

In terms of scale, the BRICS countries account for nearly half of the world's population, and the BRICS has already surpassed the G7 in purchasing power parity.

In terms of economy and trade, the BRICS countries' goods trade accounts for about 20% of the world's total, but the trade volume between them only accounts for about 10% of their respective foreign trade, and there is still great potential for growth.

The BRICS New Development Bank supports nearly 100 projects, promoting the economic and social development of member countries.

In terms of international influence, the BRICS mechanism includes major emerging economies and major countries in all continents. After the expansion, the BRICS mechanism has more influence in international affairs and global governance to safeguard the common interests of developing countries.

The data released by the Iran Customs Administration (IRICA) indicated that the value of Iran’s non-oil trade with BRICS group of countries was close to US$40 billion in the 2022-2023 fiscal year, showing a 14% increase as compared to same period a year earlier.

Iran's BRICS story is inseparable from the background of China-Iran brotherhood, and will surely add bright BRICS colors to the picture of China-Iran friendship. Iran is one of the first countries to apply to join the BRICS mechanism.

In 2017, President Xi Jinping proposed the "BRICS Plus" cooperation concept and invited Iran to join. In 2022, China assumed the presidency of the BRICS and launched the expansion process. In 2023, with the support of China and other countries, Iran was accepted as a formal member of the BRICS.

Looking to the future, China and Iran have great potential for cooperation under the BRICS mechanism. Both sides should give priority to development, pool their efforts for progress, deepen pragmatic cooperation, enhance cultural exchanges, and promote the upgrading of China-Iran friendly relations in all fields.

Both sides should safeguard universal security, work together to meet challenges, stick to independence, objectivity and fairness, promote international consensus for peace, and provide new impetus for the political settlement of hot issues.

Both sides should uphold fairness and justice, improve global governance, continue to hold high the banner of multilateralism, work closely together in the BRICS mechanism, take the lead in upholding the UN-centered international system, and promote the realization of an equal and orderly multipolar world.

Thanks to the long-standing traditional friendship and high political mutual trust between the two sides, China-Iran relations have maintained healthy and stable development. China is willing to strengthen strategic coordination with Iran, adding BRICS color to the beautiful picture of China-Iran friendship.

 

Pakistan Stock Exchange Records Highest Gain

During this past week the market lost ground in the first two days amidst rumors about potential increases in the Capital Gains Tax (CGT) due to which KSE100 index stayed bearish and the index hit 72,589 level before showing signs of recovery on Wednesday. Market recovered swiftly after the announcement of Federal Budget for FY25. The taxation measures introduced in the budget weren't as adverse as originally anticipated. On Thursday the index gained 3,410 points, most in a single day and closed at 76,706 level on Friday reaching the highest ever closing, with a gain of 2,952 points, up 4%WoW.

Despite initial jitters over proposed tax changes, the market recovered, reflecting investors’ confidence amidst pre-budget uncertainty. The week also saw the State Bank of Pakistan (SBP) announcing a first token rate-cut of 150 bps, adding further to the positivity.

As inflation outlook eases, the cut-off yields in the latest T-Bills auction dropped.

Overall, average trading volumes decreased by 3.8%WoW to 409.6 million shares as compared to 423.3 million shares a week ago.

On the currency front, PPR depreciated by 0.11%WoW to close at 278.51/US$.

Other major news of the week included: 1) RPK9 billion approved for clearing OMCs’ PDCs, 2) ECC allowed conditional export of 0.15 million tons sugar, 3) In FY25 Budget government announced to raise tax to GDP ratio to 13%, 3) government also announced to float US$1 billion bonds and obtain US$4 billion loans from the foreign banks, 4) FY25 Budget aimed raising PKR3.8 trillion new taxes and , 5) World Bank projected Pakistan’s GDP growth at 2.3%.

According to AKD Securities Commercial Banks, Pharmaceuticals, Oil & Gas Exploration Companies, Oil & Gas marketing companies and Paper & Board were amongst the top performing sectors, while laggards included Textile composite, Woollen, Leasing companies, Food & Personal Care Products and Textile Spinning.

Major net selling was recorded by Individuals with a net sell of US$8.9 million. Mutual funds absorbed most of the selling with a net buy of US$11.1 million.

Top performing scrips of the week were: BAFL, MCB, NCPL, UBL and KOHC, while laggards included: ILP, PTC, YOUW, COLG and 5) PGLC.

The post-budget market has attained some certainty, particularly in sectors that benefitted from budgetary measures. With the start of monetary easing, optimism is expected to rise, particularly in cyclical sectors.

Furthermore, the approval of the budget paves the way for the upcoming IMF program, which will likely become a significant market catalyst going forward.

 

Malaysia to build port near Kuala Lumpur

Malaysia intends to build a new container port along the western coast of the Malay Peninsula facing the Malacca Strait, one of the world's busiest sea lanes, as the country prepares to capture logistics demand created by global supply chain shifts.

The estimated 2 billion ringgit (US$425 million) port will utilize artificial intelligence to improve operational efficiency, becoming the first port in Malaysia to do so. Local property developer Tanco Holdings, through its subsidiary Midports Holdings, will lead the development in collaboration with China-based marine engineering company CCCC Dredging Co., a group company of state-owned China Communications Construction Co.

The parties signed a memorandum of understanding earlier this month.

According to an announcement, the port will be developed in the city of Port Dickson, in the state of Negeri Sembilan. Close to Kuala Lumpur and the midpoint of the Malacca Strait, it could benefit from high traffic and connectivity to key industrial regions in Malaysia.

"The construction of this port will contribute to Malaysia's goal of establishing a modern and efficient port hub, accelerating economic development in Negeri Sembilan, and bolstering Malaysia's global trade position," Tanco Group Managing Director Andrew Tan Juan Suan said in a statement.

"This collaboration with CCCC Dredging marks a pivotal step towards realizing our vision of a world-class port in Port Dickson. The expertise and resources brought by CCCC Dredging will ensure the successful implementation of this project, which is set to drive economic growth and create job opportunities in the region."

The proposed port will feature a 1.8-kilometer jetty, terminal and container operation area of approximately 809,300 sq. meters. It will be able to accommodate the largest container ships, according to Negeri Sembilan Chief Minister Aminuddin Harun, as cited in a report by Malaysian national news agency Bernama.

The companies have yet to announce an expected completion date.

As global companies diversify their supply chains, Malaysia has emerged as a beneficiary, attracting investments from electronics and other manufacturers. Klang Port, the country's largest, plans to double its capacity to capture demand, operator Westports Holdings recently told Nikkei Asia.

Aminuddin said the new port could greatly boost the nation's logistics and marine transport services industry, as a network of roads and highways will connect it to major industrial areas.

According to the announcement, AI technology will enhance the port's operational efficiency, reduce human error and lower the accident rate. The AI system will analyze traffic data, schedule ship movements, track marine operations around the port and manage automated logistics.

These advancements are anticipated to streamline processes, reduce operational costs and minimize environmental impact. The port will also feature automated cranes, self-driving trucks and top-tier cybersecurity measures with the capacity to receive large container ships, according to the announcement.

 

Pakistan: Meeting Ambitious Budget Targets

The FY25 Budget proposals are the initial steps to broaden the tax base in Pakistan (tax to GDP is still paltry 9%). It raises taxes on some key agriculture inputs (DAP fertilizer and tractors), strives to encourage tax filing, and does attempt to tax retailers and real estate, albeit with question marks over sustainability.

The Budget removes a concessionary tax regime for the exporters (barring the services export industry e.g. IT) and introduces hefty punitive measures for non-tax filers, including a restriction on foreign travel.

The key positive from the market’s standpoint is that the feared sharp increase in CGT on securities did not come through. The Budget has made CGT uniform for tax filers at 15%, but hikes to as high as 45% for non-filers. The market is likely to react positively to this.

The tax on exporters has been termed a negative. Business/ trade associations have taken sharp exception to this and significant pushback from them is anticipated to persuade the government to reverse this.

The budget proposals target a 40% increase in tax revenue. Achievement of targets depends a lot on how well the government is able to manage the pushback from exporters/ retailers.

If enforceability is an issue, then the IMF may demand additional tax measures before the Budget is passed in parliament, or there could be a mini budget by mid-year to fill any potential shortfall in tax collection.

An even higher petroleum development levy (PDL) and cuts in the development expenditure, as in the past few years, thus become very likely as well.

If the IMF accepts the budget at face value, it may be enough to secure the IMF program. In part, this may be because of the clear thrust to go after non-tax filers and some effort to bring retailers/ real estate in the tax net.

However, the IMF may wait to see the final approved budget first, and there may yet be changes given the PPP's show of reluctance ahead of the budget presentation.

 

 

Iran: Candidates advised to follow ethics

Ayatollah Ahmed Jannati, the secretary of Iran’s Guardian Council, has advised presidential candidates to adhere to legal requirements, regulations, and ethical norms during their campaigns.

“We hope that the candidates and their supporters, by observing legal standards and ethical principles in their election campaigns, will pave the way for a dignified religious democratic election,” he stated on Wednesday. 

Also warning against foul play, the spokesman for Iran’s Judiciary said the candidates’ conduct is being closely monitored.

“Everything is being monitored, and if any unethical behavior related to the election is observed, judicial authorities will take action against individuals in accordance with the law,” Asqar Jahangir announced. 

On Wednesday, there were also discussions about the candidates that the Guardian Council did not approve to contest the presidential elections.

In the past days, some of the rejected nominees took to social media to protest, claiming that the Guardian Council had made errors in evaluating the registered nominees.

In response, the Guardian Council spokesperson refuted these claims, stating that the vetting process is thorough and cannot be influenced by any political group or individual.

“At first, a report about the backgrounds and qualifications of each candidate was presented, and then inquiries about the individuals were raised. Then, based on their knowledge and information, the members of the Guardian Council independently expressed their opinions. Finally, a vote was taken,” Tahan Nazif explained during an interview with the khamenei.ir.

He added that none of the individuals in the 12-member council can be swayed by external pressure or influence. 

In addition to discussing practical economic policies to improve the national economy, two presidential candidates addressed the JCPOA and negotiations with Western nations on Wednesday.

Mostafa Pourmohammadi highlighted his past experience in negotiations with foreign adversaries to argue that he could reach beneficial agreements with the West. 

“I negotiated with Saddam, many of my close associates were martyred by him. I negotiated with the worst enemy of the Iranian nation. Still, with strength, the backing of national power and intelligence, and negotiation techniques, I managed to reach results,” he said during a televised address. “The battlefield and diplomacy should complement each other,” he added. 

Saeed Jalili also commented on negotiations with Western nations indirectly, criticizing Hassan Rouhani’s government who in Jalili’s words, tied every aspect of the economy to the revival of the JCPOA.  

“Before President Raisi's government, it was claimed that oil could not be sold due to US sanctions, and we provided solutions for oil exports to the government at that time. These solutions were taken seriously by President Raisi's government, and our oil sales reached over 1.5 million barrels per day. The surge in exports from almost zero proved that sanctions could be neutralized,” he said. 

 

Pakistan: Federal Budget FY25 Highlights

The Federal Budget was announced on Wednesday with a commitment to continue the fiscal consolidation seen last year. Most of the targets are in line with IMF guideline which will help in getting long term financing facility.

While no major reforms were seen on the exports, energy and other sectors, many tax exemptions have been removed.

Government has adapted significant tax measures to get incremental tax revenues of PKR3.7 trillion, taking total FBR taxes to PKR12.97 trillion from current year estimated number of PKR9.25 trillion.

Including petroleum development levy (PDL) in tax revenues, the FBR tax to GDP ratio for FY25 is estimated to reach 11.5% from 9.62% in FY24. For last five years this has remained 9.7% of GDP. To recall, PDL used to be tax revenue till FY20.

Analysts believe, tax measures taken under this budget are quite balanced and less inflationary than expected, as earlier it was considered that government will increase GST by 1% etc. These measures will pave the way for IMF program, if approved from the parliament.

Overall budget aims to ensure primary surplus of 2% of GDP or PKR2.5 trillion (excluding provincial surplus 1% of GDP), which is in line with the IMF guidelines.

 Some of the key announcements from the budget are: 

GDP growth target

Government has set a GDP growth target of 3.6% for FY25 as against provisional GDP growth of 2.4% for FY24. Government expects Agriculture, Industrial and Services sector to grow by 2.0%, 4.4% and 4.1%, respectively during FY25.

Analysts believe, GDP target of 3.6% is achievable as industries has started reflecting V shaped recovery; LSM index in 3QFY24 has achieved growth of 1.47%. Approximately 50% of the subsectors have recovered and posted positive growth. Going forward, with the expected decline in interest rates, industrial growth target of 4.4% seems achievable. Services sector is also expected to grow 4.1% on the back of low base, expected recovery in industrial growth and subsequently in advances of the banks, the services sector is also expected to post more than 4% growth.

The total budget outlay is set at PKR18.87 trillion for FY25, up 25%.

Markup Expense

Markup expense is envisaged at PKR9.8 trillion, 18% higher than revised estimate for FY24. Surge in Markup expense is primarily due to increase in debt to finance fiscal deficit. This will take markup expense as % of tax revenues to 75% from 5 year average of 63%. Actual interest expense for FY25 may remain lower than projected numbers due to expected fall in interest rates.

Current Expenditure

Total Current Expenditures are estimated at PKR17.2 trillion for FY25, up 21% from revised estimates of FY24. Government has earmarked subsidies of PKR1.4 trillion as compared to revised estimates of PKR1.0 trillion for FY24.

Development Expenditure

Development expenditure is estimated at PKR3.8 trillion for FY25, up 58% YoY; within this, federal PSDP is kept at PKR1.5 trillion, up 80% from revised figure for FY24. In federal PSDP, 81% of the budget is diverted to existing projects, while only 19% is allocated for new projects.

Defense Expenditure

The Defense Expenditure has been set at PKR2.1 trillion for FY25, 14% higher as compared to PKR1.86 trillion for FY24.

Revenue

FBR Tax Revenue target has been set at PKR12.97 trillion up 40% for estimated collection of PKR9.25 trillion for FY24. This is higher than average growth of 20% in last five years. Though the target is high, Government is likely to collect around PKR12 trillion based on the new tax measures. The balance numbers can be achieved through reduction in significant higher PSDP allocation.

The Non Tax Revenue target has been set at PKR4.8 trillion up 64% from last year’s revised estimate of PKR2.9 trillion, where the government has budgeted PKR1.3 trillion under petroleum development levy (PDL) up 33% from FY24 estimated number of PKR960 billion.

From State Bank, government has estimated dividends of PKR2.5 trillion, more than 157% higher than FY24 number of PKR972 billion. This seems to be higher than the governor state bank’s comment in analyst briefing on April 29, 2024 that SBP will provide over PKR2 trillion to the government next year.

Fiscal Deficit

The government has estimated a fiscal deficit at PKR7.3 trillion, 5.9% of GDP (6.8% excluding provincial surplus) for FY25 as compared to estimated Fiscal Deficit of PKR7.8 trillion, 7.4% of GDP (7.9% excluding provincial surplus) for FY24. This includes provincial surplus of PKR1.2 trillion in FY25 as compared to revised estimate of PKR539 billion for FY24.

Primary Balance

The government has primary surplus target of PKR2.5 trillion (2.0% of GDP) for FY25 as against estimated surplus of 0.4% for FY24. IMF estimates primary surplus of 0.4% of GDP for FY25 in its May 2024 report. Excluding provincial surplus, primary surplus would be 1% of GDP for FY25 and deficit of 0.13% for FY24.

Current Account

Interestingly government projects a Current Account Deficit of US$3.7 billion for FY25, which will be higher than FY24 as it is expected to be a year of surplus of US$100-200 million.

Taxation Measures

Government has relied on natural increase in Tax Revenues in line with estimated 17% increase in nominal GDP along with few of the following measures;

Increase in FED on cement by PKR1/kg to PKR3/kg. This will yield revenues of approximately PKR40 billion to Government.

Pensions reforms will save approximately PKR40 to PKR45 billion.

Capital gain tax for non filers is increased to 45%, while for the filers it is proposed uniform 15%.

Exporter (textile, IT, and rice etc) will be required to pay normal tax, earlier it was 1% full and final tax. This will help Government to collect extra PKR50 to PKR100 billion.

Tier one retailers of textile and leather will be required to pay 18% from 15%.

Standard sales tax of 18% on mobile phones will result in additional tax revenues of PKR50 to PKR100 billion.

Sales Tax exemptions granted to FATA/PATA are removed in phased manner. This will bring additional taxes of PKR10 to PKR20 billion.

Removal of exemption on custom duties on import of Hybrid vehicles and luxury electric vehicles.

No of slabs for salaried tax are reduced, while the maximum tax is proposed to be unchanged. However, for non salaried person, maximum slab is increased to 45%

Advance withholding tax on non filers Retailers, Wholesalers, and distributors is increased to 2.5% from current 1%.

Increase in PDL limit to PKR80 per liter (minimum PKR60) on HSD and MS oil. This will help government to collect around PKR350 billion.